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The Japan Center for Economic Research (JCER), Japan's leading think tank, forecasts Japan’s economy from 2020 to 2035.
1
Japan Center for Economic Research
The 47th Medium-Term Economic Forecast (Tentative Revision) July,2020
Tatsuo Kobayashi (Principal Economist)
Sumio Saruyama (Lead Economist)
Katsuaki Ochiai (Specially Appointed Fellow)
Economy before and after the Coronavirus Crisis
- Real GDP level will fall by 2% due to rapid expansion of debt
- Prolonged virus outbreak and intensified international friction will result in
“nightmare scenario”
Summary
The Japan Center for Economic Research (JCER) has revised its medium-term economic
forecast on how the trajectory of economic growth will change with the coronavirus crisis. It was
compared with the previous forecast released in March (chart 1). On June 19, restrictions on domestic
economic activity were completely lifted. However, can it return to the economy prior to the Covid-
19 pandemic? A “nightmare scenario” was also considered in which a prolonged outbreak and
intensified political and economic conflict between the United States (US) and China leads to deep
global recession. In the baseline scenario, real GDP has been revised downward by about 2%
compared to the previous forecast, but in the case of the nightmare scenario, it will fall by nearly 8%,
and will constantly remain in negative growth from fiscal year (FY)1 2029. Preventing a widespread
second wave of Covid-19, developing therapeutic drugs/ vaccines, and establishing a system for
international cooperation to mitigate and/or eliminate political and economic conflicts will be needed
in order to avoid global depression.
Chart 1 Negative growth from FY 2029 onward in Nightmare Scenario
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts
1The period of the fiscal year (FY) is from April to next March.
553.5
541.2
510.4
460
480
500
520
540
560
2000 2005 2010 2015 2020 2025 2030 2035
Previous Forecast
Updated Baseline Scenario
Nightmare Scenario
Real GDPTr. Yen
Growth paths lowered
-6
-5
-4
-3
-2
-1
0
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
ProlongedLockdown
Heavier Debt,Firms & Govt
Reduced Inbound
Worse GlobalEconomy
NightmareScenario
Decomposition of reduction in GDP
Relative to Baseline, %
Year
2
The 47th Medium Term Economic Forecast
July,2020
1. Baseline scenario: Real GDP in FY 2035, 2.2% worse than the previous
forecast (1) Economy will not return to 2018 Pre-Covid levels until FY 2024
The baseline scenario assumes that the coronavirus crisis will end in FY 2020 in Japan, the
Tokyo Olympics will be held as scheduled, and international travel to and from other countries will
gradually be eased. Still, the level of real GDP in FY 2035 will fall by 2.2% from the previous forecast.
The economy will not return to 2018 Pre-Covid levels until FY 2024. The lost income will be about
230 trillion yen from FY 2020 to FY 2035. The potential GDP will also drop by more than 2% in FY
2035. Various measures taken to control the outbreak will result in public and private debt to increase
sharply and capital spending to weaken, so the decrease in capital stock will push down potential GDP
(chart 2).
Chart 2 Real GDP, 2.2% lower than expected before the Coronavirus Crisis
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts
Behind the weak recovery in real GDP, which fell by 6.8% in FY 2020, is the weakness of
overseas economies, especially in Europe and the United States (US). In particular, the US has
suffered a severe virus outbreak and it will take some time before the restrictions on economic activity
are completely lifted. In addition, China, which is said to have controlled the spread of Covid, is
affected by the stagnation of Western economies. Moreover, China is not only in conflict with the
United States in terms of trade but also with dealing with the pandemic. For this reason, it is believed
that the growth of the global economy will not easily return to its original growth trajectory (chart 3).
The GDP level in 2035 will be 2.2% worse in the US and 2% in China. Crude oil depreciation is a
plus for Japan, but such favorable conditions will not last long. Taking world inflation into
consideration, it is assumed that oil prices will reach 110 dollars / barrel in 2035.
▲2.2
-10
-5
0
5
10
15
350
400
450
500
550
600
2000 2005 2010 2015 2020 2025 2030 2035
Deviation, right axis
Updated Baseline
Previous Forecast
Real GDPTr. Yen %
▲2.2
-10
-5
0
5
10
15
350
400
450
500
550
600
2000 2005 2010 2015 2020 2025 2030 2035
Deviation, right axis
Updated Baseline
Previous Forecast
Potential GDPTr. Yen %
F Y
3
The 47th Medium Term Economic Forecast
July,2020
Chart 3 Global economy also revised downward by 2%
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) IMF
(2) Government debt outstanding will increase to 270% of nominal GDP
In response to the coronavirus crisis, the government will provide SMEs and freelancers with
subsidies for sustaining businesses of up to 2 million yen, up to 6 million yen in rent subsidies, and
100,000 yen cash handouts to all residents in Japan. Therefore, in FY 2020, the government approved
primary and secondary supplementary budgets exceeding 50 trillion yen. All financial resources will
be covered by the issuance of government bonds. As a result, government debt will exceed 1.4
quadrillion yen in FY 2035, and the nominal GDP ratio will reach 270% (chart 4).
Chart 4 Japan’s government debt will exceed 1,400 trillion yen in FY 2035
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts, Central Government Debt "Outstanding Government Bonds and Borrowings",
White Paper on Local Public Finance
In the baseline scenario, it is assumed that from FY 2025 to 2050, an annual income tax
increase of 1.6 trillion yen will be used for the redemption of government bonds, following the
reconstruction funding method of the Great East Japan earthquake. However, it may also be covered
it by increasing the value-added tax (VAT) rate. According to calculations based on our
macroeconomic model, the impact on the macroeconomy was not significantly different between the
income tax increase and the value-added tax increase. However, there is debate over whether high-
80
100
120
140
160
2015 2020 2025 2030 2035
Previous Forecast
Updated Baseline
Nightmare Scenario
▲2.0
▲26.8
-30
-20
-10
0
2015 2020 2025 2030 2035
Updated Baseline
Nightmare Scenario
Relative to Previous Forecast, %
Downward Deviation
World GDP in 2019=100
Faltering World Economy
Year
23
271
0
20
40
60
80
100
120
0
50
100
150
200
250
300
2000 2005 2010 2015 2020 2025 2030 2035
Deviation, right axis
Updated Baseline
Previous Forecast
Government Debt OutstandingsPercent of Nominal GDP, % % point
End of fiscal year
4
The 47th Medium Term Economic Forecast
July,2020
income earners should pay more for financial measures to deal with the Covid crisis, or whether it
should be widely paid by the entire population.
Corporates debt will also surge sharply. To secure operating funds, it is assumed that debt
would increase by 50 trillion yen and cash and deposits would decrease by 20 trillion yen (chart 5).
From FY 2022 onward, capital spending will be sluggish because priority will be given to lowering
the debt ratio that increased in FY 2020 and FY 2021. Nominal capital spending will not return to
2018 pre-coronavirus crisis levels until FY 2035. Sluggish capital spending will lead to the pushing
down of potential GDP shown in Chart 2.
Chart 5 Sluggishness of investment caused by priority given to lowering the debt ratio
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts, Financial Statements Statistics of Corporations by Industry
(3) The rate of decline in per capita personal consumption will be larger than that of real
GDP
Due to the slump in the macroeconomy, the compensation of employees per person and real
consumption will also become sluggish. As companies prioritize debt repayment, the compensation
of employees will be restrained, and personal consumption will weaken by 3.0% compared to the
previous forecast. This is 0.8 points larger than the decline in real GDP. In addition, the decline in real
GDP per worker (≒labor productivity) in FY 2035 will be 0.6%. The real consumption per person
will be affected by the annual income tax increase of 1.6 trillion yen from FY 2025 onward as a
financial source for coronavirus measures. Furthermore, the business behavior of companies
prioritizing debt repayment will also adversely affect personal consumption through the compensation
of employees (Chart 6).
40
50
60
70
80
90
100
110
1990 2000 2010 2020 2030
Nominal Private Non-residential Investment
Tr.Yen
FY0
100
200
300
400
500
600
700
1990 2000 2010 2020 2030
+50
(2020-21)
Debt Outstanding of Private Firms
Tr.Yen
0
50
100
150
200
250
300
350
1990 2000 2010 2020 2030
-20(2020-22)
Cash and Deposit Outstanding of Private
FirmsTr.Yen
15
20
25
30
35
40
45
50
1990 2000 2010 2020 2030
Debt Ratio of Private Firms
Percent of Firm'sAsset
5
The 47th Medium Term Economic Forecast
July,2020
Chart 6 Decline in consumption larger than that of real GDP
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts
The unemployment rate is expected to remain in the range of 3.0~3.5% in FY 2020 due to
measures such as employment adjustment subsidies taken by the government. However, it is estimated
that the unemployment rate will reach 9%, when hidden unemployment due to suspension of business
operations and shortened working hours is taken into consideration. Hidden unemployment will
gradually disappear as the economy recovers, but overemployment will remain for more than five
years (chart 7).
Chart 7 Unemployment rate including hidden unemployment will reach 9%
(Source) Labour Force Survey, Monthly Labour Survey
(4) Even if a rapid rebound in foreign visitors occurs, pre-Covid levels will only be achieved
in FY 2028
According to the announcement of Japan National Tourist Organization (JNTO), the number of
foreign visitors to Japan dropped to 2,900 in April and 1,700 in May 2020, from an annualized rate of
30 million people before the coronavirus crisis. Although there are movements to lift travel
restrictions with some countries, new restrictions for foreign visitors are being considered such as
mandatory PCR testing and a ban on the usage of public transport. Visitor flows to Japan in FY 2020
are unlikely to recover rapidly, considering the virus outbreaks in Europe, the US and Asia, and will
46
48
50
52
54
56
2000 2010 2020 2030
Updated Baseline
Previous Forecast
Labor share(%)
▲ 3.0
-10
0
10
20
30
2.00
2.25
2.50
2.75
3.00
2000 2010 2020 2030
百
(FY)
Deviation(right axis)
Updated Baseline
Previous Forecast
Real Private Consumption per capita(Million Yen)
(%)
▲ 0.6
-10
0
10
20
30
7.0
7.5
8.0
8.5
9.0
2000 2010 2020 2030
百 Deviation(right axis)
Updated Baseline
Previous Forecast
Real GDP per worker(Million Yen)
(%)
0
2
4
6
8
10
2005 2010 2015 2020 2025 2030 2035
Unemployment Rate
incl. hidden unemployment
(%)
FYForecast
6
The 47th Medium Term Economic Forecast
July,2020
be close to zero. In the baseline scenario, it is assumed that the coronavirus outbreak will be contained
in FY 2020, and that inbound tourism demand will return in FY 2021, boosted by the Tokyo Olympics.
It is assumed that from FY 2022 onward, tourists from East Asia such as China and South Korea will
increase at the same rate as when the so-called "explosive shopping spree" phenomenon was widely
observed (FY 2012 to 2018). As a result, in FY 2028, there will be more than 31 million visitors,
reaching the 2018 pre-coronavirus crisis levels. Even in FY 2035, it will be difficult to achieve the
government goal of 60 million annual visitors (2030) (chart 8).
Chart 8 Foreign visitors down by 16 million in FY 2035 even with rapid rebound
(Note) Nominal consumption of foreign visitors to Japan per capita increases by 2% every year
(Source) Japan Tourism Statistics, National Accounts
2. Nightmare scenario: Fear of Global Depression
In the US, South America, Southern Asia, etc., the spread of the first wave of the coronavirus,
not to mention the second wave, has not been brought under control. Prevention of an outbreak a
necessary condition for full-scale economic activity and recovery, and international cooperation is
essential. However, the US, where the spread of the virus has yet to be contained, is blaming China
for its responsibility. With the trade friction from last year, the Trump Administration’s “America First”
policy intensified. The US has threatened to cut funding for international organizations such as WHO
over coronavirus and WTO over trade. In December 2019, JCER published its long-term economic
forecast " 2060 Digital & Global Economy " and warned that Trump's policy would cause the world
to split into regional blocs and the "nightmare scenario" may trigger the Great Depression. The
nightmare scenario (the worst case scenario) in the 47th Medium Term Forecast has started to look
increasingly likely. Japan's potential growth rate will turn negative in the 2020s. Real GDP will also
fall into negative growth by the end of the 2020s (chart 9).
▲16
48
64
-40
-20
0
20
40
60
80
2000 2005 2010 2015 2020 2025 2030 2035
Deviation
Updated Baseline
Previous Forecast
Million persons
Inbound Foreign Visitors
FY
-3.7
10.1
13.9
-5
0
5
10
15
2000 2005 2010 2015 2020 2025 2030 2035
Deviation
updated Baseline
Previous Forecast
Tr. Yen
Their Expenditures in Japan
in current prices
7
The 47th Medium Term Economic Forecast
July,2020
Chart 9 Japan’s economy will not recover to pre-coronavirus levels
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts
(1) Fear of second and third waves at home and abroad - Global growth rate will fall to 1%
range
In the nightmare scenario, it is assumed that the second and third waves will arrive across the
globe, and it will take time to develop a vaccine and make it widely available. The positive rate was
about 0.1% in the antibodies test conducted in Tokyo by the Ministry of Health, Labor and Welfare.
In New York, where nearly 400,000 people have been infected and the death toll has exceeded 30,000,
a little over 10% tested positive for Covid antibodies. Herd immunity cannot be achieved in Japan as
the large part of the population have not yet been affected by the virus. After the First World War, the
Spanish Flu affected 40% of the population and ended after the third wave (chart 10), but by that time
nearly 400,000 people had died. It is considered impossible for society to accept such consequences
in Japan today. If vaccine development takes time, virus outbreaks will be prolonged and economic
activities will be restricted and eased repeatedly.
Chart 10 Spanish flu epidemic spread in three waves
(Source) Ministry of Home Affairs
Covid-19 is continuing its spread across the world (chart 11). The Trump administration
claims that the US pandemic occurred because “China hid information about the infection and did not
▲5.7
-10
0
10
20
30
420
460
500
540
580
2000 2005 2010 2015 2020 2025 2030 2035
Deviation, right axis
Baseline
Nightmare Scenario
Real GDP in 2011 pricesTr.Yen
▲3.0
-5
0
5
10
15
420
460
500
540
580
2000 2005 2010 2015 2020 2025 2030 2035
Deviation, right axis
Baseline
Nightmare Scenario
Tr.Yen
Potential GDP(%)
FY
(%)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0
5
10
15
20
25
August 1918
to July 1919
August 1919
to July 1920
August 1920
to July 1921
(%)(Million Persons)
Cases
Mortality, right axis
0
10
20
30
40
August 1918
to July 1919
August 1919
to July 1920
August 1920
to July 1921
(%) Morbidity
Declined to 1/10 of the previous wave
8
The 47th Medium Term Economic Forecast
July,2020
cooperate.” This has resulted in serious conflicts with the Chinese government. The Trump
administration has also threatened to withdraw the US from the WHO, because China is too influential.
Some states have restarted their economic activities before the outbreak is over, raising the risk of
another outbreak. It seems impossible to achieve international cooperation in an attempt to control
the pandemic.
Chart 11 Global outbreak of the Covid-19 pandemic
(Source) The number of infected people was aggregated by Nikkei based on data from countries and data from
WHO and Johns Hopkins University.
It is also possible that trade friction will intensify due to the coronavirus conflict. The WTO, a
dispute arbitration institution, is already unable to get US cooperation to fill the Appellate Body
vacancies. The WTO is supposed to be able to deal with trade disputes in a two-stage process, but the
process has not been opened due to lack of a senior committee.
Considering this situation, it is assumed that the global economic growth rate would be 1%
worse than the baseline scenario (chart 12). From 2028 onward, the world growth rate will fall short
of 2% (in which case a global recession will occur) and reach 1%. Intensified friction may cause the
world to split into regional blocs. The global economy will shrink by almost 30%, and in the 2030s,
the US will be overtaken by China in terms of economic size.
Chart 12 Global economy will shrink by almost 30% due to intensified international friction
(Source) IMF, Global growth rate is calculated by weighted average by PPP-converted GDP of each country
0
2
4
6
8
10
12
14
16
18
2020/2/1 2020/3/1 2020/4/1 2020/5/1 2020/6/1
(Million Persons) Daily confirmed new cases (7-day moving average)
Europe
North America
Asia
Central and South America
Others
2020/6/28
80
100
120
140
160
2015 2020 2025 2030 2035
Previous Forecast
Updated Baseline
Nightmare Scenario
▲2.0
▲26.8
-30
-20
-10
0
2015 2020 2025 2030 2035
Updated Baseline
Nightmare Scenario
Relative to Previous Forecast, %
Downward Deviation
World GDP in 2019=100
Faltering World Economy
Year
9
The 47th Medium Term Economic Forecast
July,2020
(2) Government debt to nominal GDP ratio to reach 320%, over 1.5 quadrillion yen
Due to the prolonged outbreak (second and third waves expected) in Japan and overseas, in
the nightmare scenario, it is assumed that in addition to the coronavirus relief "financial expenditure
of 40 trillion yen" in FY 2020, a supplementary budget of 30 trillion yen will be prepared in FY 2021.
Government debt will expand from the current 1 quadrillion yen to 1.5 quadrillion yen in FY 2035.
The government debt to nominal GDP ratio will also be 320%. In the nightmare scenario, it will
implement a tax increase (1.6 trillion yen as baseline) of 2.8 trillion yen from FY 2025 on the
redemption of JGBs issued for coronavirus measures totaling 70 trillion yen in FYs 2020 and 2021.
Even so, the expansion of debt will not stop. If government debt grows at this pace, there is a risk of
financial failure by FY 2035 (chart 13).
Chart 13 Concerns about financial failure
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts, Central Government Debt "Outstanding Government Bonds and Borrowings",
White Paper on Local Public Finance
Private-sector debt will increase by 50 trillion yen in FY 2021 compared to the baseline
scenario due to securing working capital, etc. It is easy to imagine that debt repayment will be given
higher priority, and capital spending will be reduced by 13 trillion yen (about 15%) from the baseline
scenario in FY 2035. The decrease in capital stock will cause growth to fall to a negative level. Even
if efforts are made to reduce debt at the expense of investment, the debt ratio for FY 2035 will only
return to the level of FY 2020 (i.e. it cannot be suppressed to the level before coronavirus crisis.)
Chart 14)
49.6
0
20
40
60
80
100
120
50
100
150
200
250
300
350
2000 2005 2010 2015 2020 2025 2030 2035
Deviation, right axis
Baseline
Nightmare Scenario
Government Debt Outstanding
Percent of Nominal GDP % point
FY
10
The 47th Medium Term Economic Forecast
July,2020
Chart 14 The debt ratio cannot by suppressed to pre-Covid levels
(Note) Forecasted by JCER for FY 2020 and beyond
(Source) National Accounts, Financial Statements Statistics of Corporations by Industry
(3) Foreign visitors to Japan will fall to 10 million, back to levels before the “explosive
shopping spree” phenomenon
A prolonged outbreak will have a grave effect on foreign visitors to Japan. If second and third
waves of the outbreak occur, it will not be possible for Tokyo to hold the Olympics in summer 2021,
crushing hopes to bring back tourists. If vaccine development cannot be carried out for the time being,
Japan will require mandatory PCR testing on arrival, which will be a big hurdle for foreigners
travelling to Japan. Also, in China and other countries, Covid contact tracing applications are widely
used, but without such applications, Japan will be avoided as a tourist destination. A prolonged
coronavirus outbreak will shy away tourists from Japan, especially from Asia. Japan is facing
challenges in digitization and improvement of the medical system. With the global economy in a
serious recession, inbound foreign visitors will only return to 2010 levels before the start of the
"explosive shopping spree" phenomenon, and the unit consumption of visitors to Japan will remain
flat (2% increase every year in the baseline scenario). The consumption of foreign visitors in Japan in
FY 2035 will shrink to 1/10 compared to the previous forecast (chart 15).
40
50
60
70
80
90
100
2000 2010 2020 2030
Baseline
Nightmare
Nominal Private Non-
residential Investment
Tr.Yen
FY0
100
200
300
400
500
600
700
2000 2010 2020 2030
Baseline
Nightmare
Debt Outstanding of
Private Firms
Tr.Yen
0
50
100
150
200
250
300
350
2000 2010 2020 2030
Baseline
Nightmare
Tr.Yen
Cash and Deposit
Outstanding of Private
Firms
15
20
25
30
35
40
45
50
2000 2010 2020 2030
Baseline
Nightmare
Percent of Firm's Asset
Debt Ratio of Private
Firms
11
The 47th Medium Term Economic Forecast
July,2020
Chart 15 Japan’s devastating tourism industry post-Covid
(Note) Nominal Consumption of Foreign visitors to Japan per capita will be flat by FY 2035
(Source) Japan Tourism Statistics, National Accounts
(4) Complete deflationary economy, and hidden unemployment rate of 7%
In the nightmare scenario, the economy is expected to revert to full deflation. The decline in
corporate profits is reflected in wages, which will be reduced by 17% in FY 2035 compared to the
baseline scenario. Wages will continue to decline, far from what they were before the coronavirus
crisis. Consumer prices (CPI) will continue to decline as wages fall. The CPI will decrease by more
than 10% from before the coronavirus crisis (FY 2019) to FY 2035. This will result in a deflationary
spiral (Chart 16).
Chart 16 Consumer prices and wages continue to decline
(Source) Labour Force Survey, Monthly Labour Survey, CPI
The effects of the deflationary economy will also affect unemployment. As the second and
third waves of the pandemic hit the country, the unemployment rate including hidden unemployment
(e.g. suspension of business operations) for FY 2020 and 2021 will exceed 10% before gradually
declining, but overemployment will not be resolved. The unemployment rate including hidden
unemployment will reach 7.6% in FY 2035 (chart 17). The forecast assumes that companies will
48
64
11
0
10
20
30
40
50
60
70
2000 2005 2010 2015 2020 2025 2030 2035
Updated Baseline
Previous Forecast
Nightmare Scenario10.1
13.9
1.4
0
5
10
15
2000 2005 2010 2015 2020 2025 2030 2035
Updated Baseline
Previous Forecast
Nightmare Scenario
Tr. Yen
Their Expenditures in Japan
in current pricesMillion persons
Inbound Foreign Visitors
FY
▲16.9
4
3
-20
0
20
40
60
80
2.5
3.0
3.5
4.0
4.5
5.0
2000 2005 2010 2015 2020 2025 2030 2035
百
Deviation, right axis
Baseline
Nightmare Scenario
Wages per Employee
Million Yen %
▲0.9
0.6
▲0.3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
2000 2005 2010 2015 2020 2025 2030 2035
Deviation, right axis
Baseline
Nightmare Scenario
%, Y/Y % point
Consumer Prices (excl. taxes)
FY
12
The 47th Medium Term Economic Forecast
July,2020
maintain Japanese-style employment (life-time employment) and that the government will continue
to adopt a policy that allows "Unemployment within companies" to prevent actual unemployment. In
reality, it will be difficult to maintain Japanese-style employment under the deflationary spiral for 15
years and to continue the employment maintenance policy, and there is a high possibility that mass
unemployment will surface.
Chart 17 Unemployment rate including hidden unemployment due to suspension of business
operations and shortened working hours will exceed 7% in FY 2035
(Source) Labour Force Survey, Monthly Labour Survey
For inquiries regarding this paper, please contact Tatsuo Kobayashi of the JCER Economic
Research Department at t.kobayashi {at mark} jcer.or.jp. (* Please change {at mark} to @ )
© 2020exceed Japan Center for Economic Research (JCER)
Nikkei Inc. Bldg. 11F 1-3-7 Otemachi, Chiyoda-ku, Tokyo 100-8066, Japan
0
2
4
6
8
10
12
2005 2010 2015 2020 2025 2030 2035
Unemployment Rate
incl. hidden unemployment
%
FYForecast